Cash basis or traditional accounting?

Somewhere in setting up (in QuarterFile, and again when you sign up with HMRC), you get asked which accounting basis you use, cash or traditional. For most people the answer is cash basis: it is the default, and it means counting money when it actually moves.

The one-line difference

Cash basis counts money when it moves: income when it arrives, expenses when you pay them. Traditional accounting (also called accruals) counts money when it’s earned or owed: income when you do the work or send the invoice, expenses when you receive the bill. Same transactions either way: what changes is the date they’re counted on.

One worked example

You finish a job on 20 March 2027 and invoice £2,000 the same day. Your customer pays on 10 April 2027. The tax year ended in between, on 5 April.

• Cash basis: the £2,000 is income for 2027-28, because that’s when the money arrived. It lands in your Quarter 1 update, covering 6 April to 5 July 2027.
• Traditional accounting: the £2,000 is income for 2026-27, because that’s when you did the work and billed for it. It belongs to the year that has just closed.

Same £2,000, same customer, two different tax years. Expenses work the same way in reverse: on cash basis a bill counts when you pay it, on traditional accounting when you receive it.

Why cash basis is the default

Since April 2024, cash basis is the default for sole traders: you’re on it unless you actively choose traditional accounting. For individual landlords it has been the normal basis since 2017. HMRC made it the default because, for a small business, it matches the thing you actually have: a bank statement. You’re not counting income you haven’t received, and you don’t need to track who owes you what to file a quarter.

When traditional accounting is the right answer

• You carry real stock or work in progress, and a bank statement badly misrepresents your year.
• You invoice on long payment terms, so the work and the money are months apart.
• Your accountant already prepares accruals accounts for you and wants your MTD figures to match them.
• You need the treatment traditional accounting gives to certain losses or finance costs.

That last one is an accountant’s call rather than a guess. If none of the four sounds like you, cash basis is almost certainly your answer.

It can be changed

The basis isn’t a one-way door. You can change it, and it’s normally done from the start of a tax year rather than part-way through, because switching mid-year means transitional adjustments so nothing is counted twice or dropped. In QuarterFile the basis is a business setting you can edit, not something frozen at sign-up. If you’ve already filed quarters on one basis and want to change, agree the year to change in with your accountant first.

What it changes day to day

Less than you’d expect. Either way you record the same transactions in the same HMRC categories. All the basis decides is which date a transaction counts on, and so which quarter and which tax year it falls into. HMRC also asks which basis you use when you sign up for MTD, so have your answer ready before you get there.